Morgan Stanley Raises Iron Ore Outlook After Surprise Rally

Morgan Stanley raised its iron ore outlook for this year and 2017 after prices rallied in the first six months, saying that the top suppliers in Australia are managing the addition of new supply and steel demand in China will remain supported.

The 2016 forecast was increased 17 percent to $46 a metric ton and the outlook for next year was raised 13 percent to $42, according to a quarterly report. While the bank has boosted quarterly forecasts, its revised call of $35 a ton for the final three months of this year signals that prices are still expected to drop below last year’s trough.

Iron ore has surged this year after China added stimulus, boosting steel consumption in the top user and surprising many analysts who’d predicted a fourth year of losses. Morgan Stanley said that it’s possible the two biggest miners in Australia, BHP Billiton Ltd. and Rio Tinto Group, are “adjusting” the addition of new supply to accommodate weaker market conditions.

“A reasonable trading range for the ore price during March to September is $45 to $55 a ton,” analysts including Tom Price wrote. That would preserve the profitability of the majors and underpin development of Gina Rinehart’s new Roy Hill mine, which may ship 30 million tons in 2016, they said.

Ore with 62 percent content was at $53.65 a dry ton on Tuesday, 23 percent higher this year, according to Metal Bulletin Ltd. The price bottomed at $38.30 a ton in December as China’s economy slowed, hurting demand just as low-cost seaborne supply increased.

Seaborne supply will rise just 0.3 percent this year before expanding 5 percent in 2017, Morgan Stanley said. The global market, which was near-balanced last year, is expected see rising surpluses, with a glut of 33.4 million tons in 2016 gaining to almost 100 million tons by 2018, it said.

The iron ore market will take longer to balance out than other commodities such as oil as excess supply takes years to be absorbed after a boom, BHP Chief Executive Officer Andrew Mackenzie said this month. After recent swings, the price is now more realistic on the basis of supply and demand fundamentals, he told an audience in New York.

Not only will the top suppliers continue to expand shipments in the third quarter, minor producers are also expected to boost exports, Goldman Sachs Group Inc. said in a report on June 15. The bank sees prices at $45 next quarter and $38 in the final three months, before averaging $35 over the next two years.

Miners’ shares were mixed in Sydney. Rio rose 0.3 percent to close at A$44.20, while BHP ended 0.3 percent lower and Fortescue Metals Group Ltd. fell 3.7 percent. The three are Australia’s biggest iron ore producers.